Continued war of attrition on façade easements

In what appears to be the latest volley by the IRS in its relentless attack on the use of façade easements, the IRS issued IR 2014-31, which is a news release that announces that the IRS Office of Professional Responsibility (OPR) has reached a “settlement” with a group of appraisers accused of participating (called aiding in the tax world) in the understatement of federal tax liabilities by overvaluing façade easements given pursuant to Section 170(h) of the Code. Clearly the news release is issued in an attempt to chill the use of façade easements authorized by Congress and signed into law under Section 170(h).

The IRS’s first line of attack on appraisals prepared in connection with façade easements can be found in a number of cases in which the IRS attacked appraisals relating to façade easements by finding that such appraisals did not satisfy the Code’s requirement under 170(f)(11)(C) that a deduction claimed for a noncash gift of property valued in excess of $5,000 must be substantiated by a “qualified appraisal prepared by a qualified appraiser.” We discussed this line of attacks previously.

The IRS had early success in that line of attack in Scheidelman, TC Memo 2010-151 and Friedberg, TC Memo 2011-238 as well as Rothman, TC Memo 2012-163. All of these cases initially found that an appraisal prepared in connection with a façade easement did not qualify as a qualified appraisal. However, as a result of the appeal, vacation and remand ofScheidelman in the 2nd Circuit Court of Appeals (109 AFTR 2d 2012-2536), the Tax Court’s prior decisions in this area have changed as to whether such appraisals of façade easements were qualified appraisals. We also discussed this issue in a previous Blog. While these cases found that the appraisals used in valuing the façade easements were qualified appraisals, the taxpayers have not been as fortunate. In the ultimate determination of value in these façade easement line cases, the Tax Court normally has found that the façade easements in those cases had no value to speak of. The good news was the taxpayer’s successful pushback on the IRS attack on whether the appraisals were even qualified appraisals. This development impacts open space easements, as the appraisals prepared in open space conservation easements also must be considered a qualified appraisal.

It appears that the IRS has licked it wounds in these cases and have devised a method of attack that does not require the help of the court system. Building on the results of many cases that find that the value of façade easements is very low, the news release indicates that the appraisers in question used a flat percentage diminution (usually 15%) as the amount of the deduction and that this approach to valuation of façade easements is frowned upon by IRS. Under this settlement, the appraisers admitted to violating Sections 10.22(1) and (2) of Circular 230, which means they admitted to a failure to exercise due diligence in the preparation of documents relating to IRS matters and failing to determine the correctness of written representations made to the Treasury Department. The appraisers agreed to a 5 year suspension from valuing façade easements and “undertaking any appraisal services that could subject them to penalties under the Code”. If they violate the terms of the settlement, the IRS will likely disqualify them from practicing before the IRS (ban them from presenting evidence or testimony in administrative proceedings before IRS and would make any appraisal given after disqualification without probative effect). A similar fate was imposed upon another appraiser in early 2013, but the restrictions on that appraiser were made permanent in a court order that imposed the restrictions through a permanent injunction. A similar injunction was slapped on the Trust for Architectural Easements in 2011 relating to different concerns that the IRS worried about in July, 2011.

So without having to fight it out in a courtroom, the IRS seems to have sharpened a tool in its armory to further it war of attrition on façade easements.